The retirement security challenge in the new age of insecure retirement

If California is any example for the rest of the country, a secure retirement is becoming much harder to attain for the average American. As corporations and government move more economic risk onto the backs of American families, middle class and low-income workers are struggling to keep afloat leading up to and during retirement.

A new report issued by the University of California Berkeley Center for Labor Research this month shows that Californians are facing a greater amount of risk and responsibility in planning for their retirement; and as defined benefit plans like pensions disappear, most retirees find themselves having to rely almost exclusively on Social Security to get by.

What was once the “three-legged stool” of retirement security — Social Security, defined-benefit pensions, and private savings — no longer exists for most Americans. The virtual elimination of defined benefit pension plans in the private sector has left only the top quarter of retirees with a balanced distribution of income. The rest of us are sitting on a broken stool, hoping to fix it before we fall into poverty in our old age.

The UC Berkeley report, Meeting California’s Retirement Security Challenge, found that “nearly half of California workers — including a large majority of young workers age 25-44 — are projected to lack sufficient resources to meet basic expenses when they retire.” The study found that as of 2009, only 52% of workers in California had access to any type of employer-sponsored retirement plan, and only 44 percent participated in such a plan.

Furthermore, a majority of those who do participate are enrolled in defined contribution (DC) plans, such as a 401(k), which poses some serious problems.

“Participation is voluntary, and many workers choose not to participate or contribute inadequate sums,” Jacob Hacker explains in the introduction to the report. “Plans are not adequately regulated to protect against poor asset allocations or corporate or personal mismanagement. The federal government does not insure DC plans, and DC accounts provide no inherent protection against market or longevity risks.” In other words, the traditional pension plan is disappearing, and what we’re left with is an insecure form of retirement income.

Unfortunately, that leaves many Americans relying too heavily on programs like Social Security. The mean retiree income in California between 2007-2009 was $25,984, of which $11,000 came from Social Security. For the middle and lower classes, the numbers are worse. The bottom quarter of retirees, with a mean income of under $7,000, received 90% of their retirement via a combination of Social Security and government-provided supplemental security. For the middle half, whose mean income was just over $18,000, 72% of their income came from Social Security and supplemental security. The pie charts on the right provide a clear picture of the sources of income for retirees in California, which is representative of the rest of the country.

Experts like Jacob Hacker believe this doesn’t have to be the end of secure retirement. “If we do not act, future retirees will face a more unequal and risky retirement than do those living in the waning days of the Golden Age of Retirement,” he writes. “But that does not mean that we cannot develop a new image of retirement for the future that, like the old, provides people with the means to enjoy broad economic security both during their working lives and during retirement.”

The report includes opinions from researchers and economists that explore solutions to improve workers’ retirement income in both the private and public sectors, while keeping Social Security as a more reasonably sized “leg” of the stool. While the various solutions differ, they all insist that the key elements of retirement security are for plans to provide adequate savings to employees, have managed investment risk, and provide a steady lifelong stream of income during retirement – all of which are benefits of pensions, in contrast with 401(k)-type savings plans.

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